RA Chandroo

Elara Capital's MD finds not valuing Reliance Industries’ future as a consumer company will be a grave investing mistake

Reliance Industries has always been referred to as the country’s petrochemicals major but today it is fast emerging as India’s largest consumer company with no comparable peers and a contemporary to FAANG (Facebook, Alibaba, Apple, Amazon, Netflix and Google). The vision and gumption of Mukesh Ambani is underappreciated and underpriced and investors who ignore this will do so at their own peril.

Intuitively, it is difficult to imagine Reliance as India’s largest consumer company. Or, for that matter, even as a leading technology, media and internet convergence player in the fastest-growing economy in the world. It is antithesis of whatever Reliance has stood for decades, and, hence, it is more difficult to imagine and digest this metamorphosis. At every stage, there will be doubts and, herein, lies the opportunity for investors.

If one searches for Reliance Industries on Google, the tag line will show retail markets, telecom and petrochemicals. This transformation has happened over just the past 10 years. Between Reliance Retail (35 million footfalls), Jio with around 250 million customers and its media and entertainment business with 700 million viewers, the footprint is huge. Collectively, its reach is equal to, if not more to, Hindustan Unilever, India’s largest FMCG firm, which reaches to around 700 million Indians. Between the three businesses, Reliance has some of the most promising brands and a finger in the wallet of one out of two Indians. As the 4C (connectivity, carriage, content and commerce) converge, an unseen force multiplier will kick in into the business — the form and shape only left to imagination.

The Three Sisters

The technology renaissance of the late 1990s saw the birth of Amazon and Alibaba, and both companies have been 20 years in the making. Reliance’s newgen businesses lag the two behemoths by a decade, but the similarity is stark in the way they operate in. While both Amazon and Alibaba are moving more towards the “brick and mortar” linkages, Reliance is moving convergence towards an omni-channel. Its ambitions in linking 30 million small businesses are similar to that of Amazon and Alibaba’s B2B marketplace. However, Reliance’s foray into education and healthcare will be unique.

Amazon Prime has 90 million subscribers and at last count its user base was 310 million active customers. A Consumer Intelligence Research Partners survey, which includes data from 500 Amazon customers, estimates Amazon Prime subscribers spend $1,300 per year, nearly double the $700 per year average that a non-member spends on the e-commerce site.

Amazon’s market cap is higher than that of Alibaba’s (570 million active customers) as it claims 40-50% of all online sales in the US takes place on its platform. But the opportunity pie is bigger for Alibaba as it claims 80% of online sales globally happens on its platforms. Of course, the difference is in the average revenue per user, which reflects monetisation capability. Asia will account for 60% of global e-commerce sales, with China accounting for 58%. India cannot be left behind with its population and consumption dynamic. Alibaba is seen as a proxy to China’s middle-class growth — a benefit that cannot be denied to Reliance, given the network it has built. Alibaba uses the phrase “Gateway to China” to describe itself; if so, Reliance is the “Gateway to India” as its biggest e-commerce play.

Valuation Catch

Reliance’s value creation journey has been linked to its book accretion, given it has always operated in the old economy, cyclical and largely commodity businesses. Over the past decades, as its return ratios hugged book value growth (closer to mid or low teens), it failed to delink from this association. It was never fortunate to command higher multiples. Since its initial public offer in 1977, Reliance’s net worth has compounded at 30%, while market capitalisation has seen a CAGR of 32%. Ironically, companies far smaller in size, reach or numbers have challenged the market cap sweepstakes over the past 10 years, given their return profiles. This is set to change as Reliance shifts orbit to be a FAANG company and cuts its umbilical cord with commodities.

Today, Reliance is valued for its traditional businesses and an iota of recognition for its retail and telecom businesses. Ambani has articulated an ambition of crossing 1,000 billion in operating profit from new consumer-facing businesses by 2027 and closer to where Alibaba stands today. At the rate and a multiple that Alibaba and Amazon trade at would imply a $300 billion market cap. This means the stock will post a CAGR of 24% over the next five years. This is difficult to imagine and will require a leap of faith.

The next decade could well see Ambani leapfrog to theleague of Jeff Bezos and Jack Ma as the market starts to discount the convergence and a new term e-commerce gets tagged to its retail, telecom and media kitty. The company will be at least $300 billion in market cap (3x of today) if not more in the next five years, compounding at 24%. In doing so, it will catapult to the global league of internet companies. This is Ambani’s final hurrah and he will leave a legacy, which is equal to if not greater than his visionary father, Dhirubhai Ambani, before he hangs up his boots and passes on the baton to the next generation. It may only be a coincidence that the end of the decade will be 50 years of Reliance since its IPO and could well be Reliance’s golden decade.

The writer has no position in the stock, but Elara Capital has recommended the stock to its clients

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